6/06/2012 @ 6:00PM

Book Value

Mark Coker and his wife, Lesleyann, a former reporter for Soap Opera Weekly, had spent a year writing Boob Tube, a satirical novel depicting the seedy private lives of Hollywood soap opera actresses. Though lauded by agents at Dystel & Goderich, an agency best known for representing President Obama, publishers fretted over the novels salability. Why gamble on a couple of unknown authors? Two years, several revisions and a dozen rejections later Coker and his wife were out of options. Commercial merit is a dangerous way to judge a book, he argues. It means you get more stuff by Kim Kardashian than by undiscovered authors potentially writing future classics.

Instead of getting mad, Coker got entrepreneurial, launching a printing press in the cloud. As the CEO of Smashwords, a 14-person company in Los Gatos, Calif., Coker gives authors free self-publishing software that converts Word documents into e-book files–and lets them set the price. Through ­distribution partnerships those e-books line the shelves of digital bookstores run by
Apple
,
Barnes & Noble
,
Sony
and Kobo. No deal yet with Amazon.

Smashwords publishes 127,000 titles by 44,000 writers, each of whom collects at least 60% of royalties–four times the amount offered by traditional publishers. The company takes a 10% cut of the proceeds from partner sales and 20% from books sold through its own website.

Launched in May 2008, Smashwords published 140 books in its first seven months–a number Coker found thrilling, until he looked at sales. On a good day the company was selling $6 worth of books through its website, its own take barely more than a dollar. Coker switched to a distribution model the following year, offering retailers a 30% commission in exchange for digital shelf space. After inking agreements with four major partners in a matter of months, Smashwords debuted in the iBookstore with 2,200 titles when the iPad launched in January 2010.

The company has grown at a steady clip since. Now the top supplier of titles to the iBookstore, Smashwords reached profitability in September 2010. Coker projects $12 million in revenue this year, double last years take. With an expected 2012 pretax profit approaching $1 million, the company intentionally keeps margins slim to squeeze out competitors, though Coker expects fatter profits as the company scales. It costs essentially the same to pump 10,000 new books a month through our network as it will cost to do 100,000 a month, he reasons.

Since authors enjoy a healthy cut of sales, most set prices low. A Smashwords book retails, on average, for just above $3; 15,000 titles are free. Romance and erotica books account for nearly 40% of sales–no surprise for a medium that lends itself to anonymity (no nosy cashier, no bodice-ripping covers).

Coker, 47, is soft-spoken, spending much of his free time in a home library that bulges with thousands of the trade paperbacks hes helping to push into a diminishing number of used bookstores. He began his entrepreneurial career at the age of 5, selling a pet chickens eggs door-to-door in Los Gatos. After graduating with a business degree from UC Berkeley he ran his own p.r. firm, then created BestCalls.com, a directory for public corporate earnings calls, in 1999. He sold the company to Shareholder.com for an undisclosed sum in 2003, profiting again when Nasdaq ­acquired Shareholder in 2006.

In building Smashwords Coker shunned outside investment, took an $80,000 home equity line of credit and borrowed another $200,000 from his mother. He ran a lean, three-man operation well into 2010, working as his own customer-service rep while nailing down partnerships with corporate ­giants. He still holds 88% of the companys equity. It gives me an incredible amount of freedom, he gushes.

Whats that freedom worth? Thats an unwritten chapter. Smashwords saw attrition when Barnes & Noble opened its own self-publishing platform in 2010, offering authors an extra 5% of royalties compared with Smashwords terms. Apple, Amazon and Kobo have similar options, though Coker argues that none offers sales generation via multiple retailers. Rivals that cater to independent e-book authors-BookBaby of Portland, Ore., Author Solutions in Bloomington, Ind. and Lulu of Raleigh, N.C. among them–match Smashwords breadth of distribution. But Coker points out they goose sales by hawking conversion, formatting and other ­services. Smashwords, he says, prefers to live and die by its authors sales.

One other twist in the plot: Smashwords has no formal distribution agreement with Amazon, the current heavyweight of e-reading. I actually think thats one of our greatest strengths, Coker contends. Hmmmmm. Maybe. Because Smashwords refuses to allow Amazon to set prices, the e-commerce behemoth denies the company access to the automated distribution ­system that supplies the Kindle Store. Though a compromise has been worked out for Smashwords to publish titles in bulk through Amazons self-publishing system, plans are over a year behind.

Coker & Co. also have some exposure in the feds case accusing Apple and ­several book publishers of colluding to keep e-book prices high. Like the iBookstore, Smashwords agency pricing model allows authors to set their own prices. Though he is not a party to the case, Coker himself spent an hour on the phone with DOJ investigators, ­sharing data that demonstrated the drop of Smashwords book pricing over time.

For now, Coker is focused on speed. The lag between the submission of a manuscript or the tweak of a book price and its appearance in retailer bookstores is currently a matter of days. Soon it will be minutes, by dint of code being done in-house. Smashwords is working to offer authors instant, aggregated sales data from its myriad partners, all part of an effort to give ink slingers real-time control over their livelihoods. To cope with the growing volume of books, the company is adding two employees to its three-person vetting team to make sure that each book is formatted correctly and contains original content.

This is the best time in history to be a writer, Coker muses. If a Smashwords title doesnt do well in its debut, it has plenty of time to pick up readers and gain an audience. Once upon a time your words lived forever only if you were Homer or Shakespeare or Dickens. Now, thanks to cloud-based publishers, any book can become immortal.